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Home >Markets >Mark To Market >Price hike rekindles Gujarat Gas stock

Shares of Gujarat Gas Ltd have rallied roughly 3% in the past week after a steep 20% correction since August. This optimism comes on the back of recent price hikes taken by the company.

The surge in spot gas prices has been weighing on city gas distributors such as Gujarat Gas owing to the impact on profitability. Spot LNG (liquefied natural gas) prices have seen a steep rise fuelled by high demand and shortages in Europe and other regions. Spot LNG prices had even crossed the $30 per mmBtu (metric million British thermal units) mark, a significant rise from $2 per mmBtu in May last year.

Domestic gas prices too have been hiked from $1.79 per mmBtu to $2.6 per mmBtu recently. The company has hiked its prices to offset the impact from higher gas costs.

Favourable uptick
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Favourable uptick

Analysts point out that prices in PNG-industrial and PNG-commercial segments have been hiked by as much as 25%. What’s more, prices of CNG (compressed natural gas) have been hiked by 2.5/kg.

Unless LNG prices rise sharply from here on, the management’s guidance of 4.5-5.5/standard cubic metre for margins would be well-protected, analysts at Motilal Oswal Financial Services Ltd said in a report.

The sharp 25% price hike taken by Gujarat Gas in the industrial segment is encouraging and appears to cover $22 per mmBtu spot LNG price as long as volumes are at 11 mmscmd (million metric standard cubic metre per day), said analysts at Jefferies India Pvt. Ltd in their note. This gives some comfort on near-term earnings, they added.

However, price hikes cut both ways: they may support profitability but can also impact volumes in the near term. Analysts believe that the company’s sales volume in the industrial cluster of Morbi in Gujarat may have already fallen in September, post the price hikes in August.

Gujarat Gas has hiked prices by 40% since January as against a 12% hike by manufacturers in the industrial cluster of Morbi. This could potentially lead to some slowdown in volumes from the plants operating at lower margins within the Morbi cluster, said analysts at Jefferies.

The drop in volumes meant that the company had to buy less of high-cost spot LNG, which may help on the margins. The Q2 Ebitda (earnings before interest, taxes, depreciation and amortization) margin could still be robust at 5/standard cubic metre or even more due to lower spot exposure, analysts said.

That said, the company’s volume growth would be closely watched this year for any long-drawn weakness.

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